MASTERCLASS: ESG - May 2020

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  • 52 mins 58 secs
Three experts examine ESG trends, integration and awareness. They share how COVID-19 has shaped what investors are looking for in their portfolios and discuss how public equity ownership is advancing environmental, social and governance goals.

  • Mozaffar Khan, PhD- Quantitative Senior Research Analyst, Causeway Capital Management LLC
  • Kimberly Gifford, CFA- Portfolio Analyst, Sustainability Leaders Strategy, ClearBridge Investments
  • David Sher- Co-CEO, Greenbacker Capital

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MASTERCLASS

Jenna Dagenhart: Welcome to Asset TV. This is your ESG Masterclass. We'll discuss ESG trends, integration and awareness taking a closer look at the efforts being made to advance environmental, social and governance goals. Joining us now are three expert panelists. Kimberly Gifford, portfolio analyst, sustainability leader of strategy at ClearBridge Investments, Mo Khan quantitative; Quantitative Senior Research Analyst at Causeway Capital Management, and David Sher; co-CEO of Greenbacker Capital. Everyone, thanks for being with us. Kimberly, starting with you, what's your definition of ESG?

Kimberly Gifford: So ESG is a more recent term applied to the area that was previously known as SRI or socially responsible investing over a decade ago. And there are a number of slight variations on how others have defined ESG, but generally speaking at ClearBridge, we view ESG as an approach to investing, which incorporates the relevant environmental, social and governance factors as part of our overall investment analysis.

Kimberly Gifford: And our view of ESG is through the lens of ESG integration, which really means incorporating ESG considerations into our fundamental research process.

Jenna Dagenhart: And Mo, how would you describe ESG to advisors who might not be as familiar with these standards?

Mozaffar Khan: Really, ESG is a collection of issues that traditionally have not received as much attention in investment analysis and part of the reason is because a lot of these are emerging issues. And so, if you... An example might be climate change and global warming, and if you trace out some of the effects of that, some of the physical effects and...

Mozaffar Khan: There's a large portion of the global population, for example, that lives along the coasts and one of the physical effects of global warming is projected to be an increase in the frequency and intensity of destructive storms leading to coastal inundation. And that's going to lead to a loss in property and infrastructure along the coast. And we can see that in New York City, we can see that in New Orleans and Houston and Miami and so on.

Mozaffar Khan: And so those exposure, firms, companies have to take those into account. For example, if you're an insurance company, you have to ask, "Am I correctly pricing in these risks?" If the premium is too low, the insurance company bares a loss. And if it's too high, then it's going to lose some revenues to these customers, not be able to provide insurance.

Mozaffar Khan: And so it's a collection of issues that traditionally have not received sufficient attention, but increasingly are being understood to have an impact on companies' future cash flows and discount rates, therefore they're relevant to investment analysis.

Jenna Dagenhart: David, what are some of the different styles of ESG investing?

David Sher: So of course, ESG means environmental, social and governance and covers a huge amount of aspirational goals such as lowering emissions, improving water quality, on the environmental side, increasing diversity in the workplace or promoting more fair wages on the social side, and so forth.

David Sher: What I want to talk about here is another dimension of looking at SRI or ESG investing, and that is the distinction between direct investing where the investors dollars go directly into creating impact such as building a LEED certified building or a solar farm. Basically, that's what we do at Greenbacker. We buy solar and wind farms that all have long-term contracts to sell electricity to utilities and municipalities.

David Sher: The impact is very direct. It's very measurable. We can tell how we're doing in a number of different things such as carbon emissions or how many jobs we're creating. Now compare that to other areas of ESG investing, indirect investments. These could be funds that invest in liquid stocks or bonds based on whether a company has adopted certain policies that are viewed as socially responsible.

David Sher: Remember that in most cases, buying a stock or a bond in the open market does not create any direct impact. Generally, you're buying a stock or bond from another investor, especially essentially what you're doing is you're sending a signal to the company, that you want them to pursue some environmental or social goal. And that's where the difficulties began because while there has been considerable effort to try and bring data and measurement to social and governance goals, actual impact is hard to measure.

David Sher: So I'm just really looking at it from tow dimensions. That's direct investments versus indirect investments.

Jenna Dagenhart: And obviously the Coronavirus pandemic is impacting assets across the board. Mo, I wonder how is COVID-19 impacting ESG?

Mozaffar Khan: That's obviously a very timely question and there might be some sense that given the urgency of COVID-19, that it's going to take away some attention, distract some attention from EDS, NDE issues and goals, but at Causeway really, we have a different view. A couple of points. The first is that we expect... COVID-19 is actually going to lead to an increase in attention that's paid to ESG issues.

Mozaffar Khan: First, those structural drivers of ESG, the underlying consumer preferences, consumers changing their purchasing decisions to line with certain ESG views that they might have, for example, lowering the carbon footprint of their purchases, that's still there. The policy and regulatory attention to these issues continues to be there.

Mozaffar Khan: The European Commission recently announced actually, just last week that the Green Deal, the European Green Deal is going to be very much a part of the COVID-19 recovery package. And so, we see these components continue to be in place. That's not going away.

Mozaffar Khan: The other point is that ESG funds in Q1 when markets were severely impacted by COVID-19, ESG funds, for example, the MSCI ESG Leaders Indices outperformed the broader index. They continue to perform well. And so, I think that's going to lead to a lot of investors taking another look at ESG and to increase interest in it.

Mozaffar Khan: I think those are still there. And then the other part is that COVID-19, I think has reminded us all of the shared vulnerabilities and fragilities really that are inescapable in the sense. We were unprepared for COVID-19 as a pandemic, but with climate change, it is something that I think increasingly people will feel that this is something that's going to affect us all and it's going to be inescapable and I think the attention therefore will not... The interest in those issues will not go away.

Mozaffar Khan: Beyond that, beyond the interest not abating, I think what is going to happen, the other part of what's going to happen is that there's going to be a shuffling of interest slightly between the E, S and G issues. Environmental climate change was always top of mind, always very important. Governance has always been important. I think some of the social issues for example, sick paid leave for employees, providing personal protective equipment, distancing at work and so on, these are going to increasingly become important and come to the fore.

Mozaffar Khan: And then obviously, in terms of governance, some of the issues around compensation are going to be increasingly a part the attention and scrutiny. And so really at Causeway that's the way we view the impact of COVID-19, one, that it's probably going to lead to an increase in interest in ESG issues. And secondly, it's going to bring some issues and some ESG pillars, for example, the social pillar that previously were sort of not as much in the forefront, it's going to bring them more into focus.

Jenna Dagenhart: Interesting too how one of the positives that I think is emerging from this pandemic is the E in regard to bless pollution, it's interesting when you see some of those aerial shots of Earth.

Mozaffar Khan: Yeah, you're absolutely right. There's a clean, the air all of a sudden has become cleaner, and you can actually see distant peaks, whether you're in India, and you can see different distant peaks and so on. So yes, I think this is going to remind us all of something that we had missed for a long time.

Jenna Dagenhart: And David, how is the experience of COVID-19 shaped what investors are looking for in their portfolios?

David Sher: So I think that investors are still trying to assimilate to the new normal. I think it's safe to say that many investors, particularly larger institutional investors are looking for defensive investments that are uncorrelated to the broader market. It seems like whenever there is any kind of global problem, everything correlates to one. But in certain cases, there are industries that have performed well.

David Sher: I would also say that we've begun to think about which workers are truly needed in our economy. The people who deliver food to us, the people who produce the food, the people who are at the front line in the hospitals are obviously critical to our economy right now.

David Sher: I would also add that in our particular case, we are in the power business. And electricity is a critical commodity to do anything. So, we think that's area where there's a lot of security. So old notions of where value can be found are still kind of holding sway amongst the investing public. But they're trying to find out where value is and it's not easy to do when everything is... When earnings are falling off the face of the earth and businesses are closing. That's kind of where I would add.

Jenna Dagenhart: Interesting point too, about the food. We're seeing inflation in food prices, especially meat. What you said about us realizing the people that we need.

David Sher: Right. It's one of these things for us. So again, we're in the solar business, so we're in the fortunate position of providing essentially an essential service to consumers and to businesses. So, we've been relatively unaffected by this. But there are other businesses that you would think are completely safe over the long-term that have had to really rethink the entirety of their business.

Jenna Dagenhart: And Kimberly, as a fundamental investment manager, what's been the focus of Clearbridge’s conversations with the companies you own in the wake of COVID-19?

Kimberly Gifford:Yeah. So ClearBridge is a global equity manager. So, we have offices all over the world, but we're headquartered here in New York City. So, we've definitely been experiencing the COVID-19 pandemic on very personal levels, so we understand firsthand some of the challenges the pandemic has presented.

Kimberly Gifford: But I'd say overall, we've been pretty impressed with the way companies are managing their businesses in a compassionate, thoughtful manner considering all of their stakeholders. And so, what we're really expecting is for companies to find the fine line between quality near-term performance while also trying to enhance or maintain the opportunity for success of the business in the long-term.

Kimberly Gifford:And ultimately, we really believe that those that do the right thing for all of their stakeholders will improve their reputation and their brand equity. And those that fall short may potentially open themselves up for some negative impacts in the long-term.

Kimberly Gifford: And so specifically in my role as a fundamental analyst, who incorporates ESG in my research process, I've been holding conversations with management teams specifically on the response to the COVID-19 pandemic. And so, some of these conversations have touched on topics like employee safety, employee health. And those are pretty well understood in terms of those should be the baseline of what companies should be doing. But we've also seen companies take the extra step and think about the financial well-being of their employees.

Kimberly Gifford: And then on a broader level, at larger enterprises, they're looking at trying to think about how their employees are and feel safe about coming back to work. And so how do we adjust the workspace to respect these new social distancing parameters that we've all come to embrace?

Kimberly Gifford: And finally, we've actually seen some of our companies really step up to the plate and reconfigure their entire manufacturing facilities to help produce PPE or personal protective equipment for those areas that are most in need. So, we know it's early on, but I think we've really been encouraged by the conversations that we've had thus far, and we plan on continuing those dialogues and kind of tracking the progress of the companies as the situation unfolds.

Jenna Dagenhart: That's great about the PPE equipment. I know certainly a lot of shortages across the country. And David, you mentioned this earlier but with April job losses hitting a record 20.5 million, earnings flowing and valuations ticking higher, what are some important considerations for investors wondering where to park their money right now.

David Sher: So I think a lot of investors are still trying to figure out the answer to that question. Obviously, there has been a bounce to the stock market that in many business journals people have brought up the difficulty of reconciling improved stock market performance with how Main Street has been performing, who have obviously been catastrophic, job losses across many industries. In fact, many businesses have closed and are likely to close.

David Sher: I think, Paul Krugman, the economist for the New York Times suggested that one reason why the stock market has performed better than other areas of the economy is that people just simply don't know where to put their money. Bond yields are at historic lows, but at the same time, the stock market really hasn't collapsed.

David Sher: In fact, it's rallied from recent lows. Valuations are historically high. I think they've reached levels that we haven't seen since '99, 2000, which obviously was a peak in market performance. I think once earnings are reported by companies, we're likely to see some serious declines in earnings.

David Sher: So we really just don't know where the market is going to go. And I think people are looking for places to put their money. What I would suggest is investors look at real assets where earnings are based on activities that are necessary in good times and bad. Renewable Energy is one area, particularly renewable energy projects. There are others in the healthcare area as well as food farming, etc.

Jenna Dagenhart: And Kimberly, what are some key ESG themes that you've been focusing on lately at ClearBridge?

Kimberly Gifford: Yeah. ClearBridge recently released our 2020 Impact report, and that really showcases the sustainability issues we've been addressing throughout the year with our portfolio companies, our investors and broader industry organizations in the ESG space. And so, some of the topics we expand on in that report are disruption in the food industry, gender diversity, the use of plastic packaging and responses to the opioid crisis. One of the areas the firm's been focused on lately is the topic of gender equality in corporations globally.

Kimberly Gifford: And what we found was that the top-level diversity data is relatively easy to find, but historically, most people have stopped there when evaluating diversity at companies. And a company can really look good on those top-level metrics, but then when you take a closer look, you won't necessarily see the good diversity practices at the top level, flowing down to the deeper levels of the company. And there can still be issues of inequality that exists deeper in the surface.

Kimberly Gifford: So our goal here is to really encourage companies to increase transparency deeper in the organization's corporate structure so we're better able to assess the level of equality that exists beneath the surface. So, from here, we'd really encourage companies to start taking steps to improve their gender diversity and publicly set goals that they'll be held accountable for in the future for years to come.

Kimberly Gifford: Sort of like I mentioned, we've actually seen that our diverse board or management team doesn't necessarily translate into having a gender friendly work environment or having gender diversity while we're down to corporate levels. And so, we're trying to assess the overall gender diversity picture of a company on different aspects. And so more qualitative information like trying to understand the policies or practices that are in place at a company, those are harder to assess from high level data, although it would be great to have more data like we spoke about, but I think that's when you really get the value of engagements with companies because they're you can sit down and have a dialogue with them about any sort of cultural issues that might be skewing the diversity data, or any sort of practices or policies they have in place that might not being utilized because their employees may not feel empowered to tap those. So, we really drive a lot of value from those engagements in trying to understand the true representation and the culture of the firm.

Jenna Dagenhart: Don't judge a book by its cover, you got to dig deeper than that.

Kimberly Gifford: Exactly. I mean, I think we spoke about it and it's a big issue in the ESG space right now, is everyone's looking for increased levels of disclosure and transparency but the metrics or the data set isn't always agreed upon and can vary from company, from sector, from market cap, from geography. So, I think the first step is really trying to get more data, get what the companies have and are willing to release and they feel comfortable telling us and then working to improve the data and put some more context around it.

Jenna Dagenhart: Mo, turning to you what are some of the most prominent ESG issues for investors and why?

Mozaffar Khan: Yeah, Causeway is a global public equity specialists and so we really look at what are the ESG issues globally that are important to consumers and investors? They're on climate change, for example, definitely, I think by far under the environmental pillar, climate change is a very important issue. It's one of the most prominent. I mentioned an example earlier, but more directly the effect of warming we could see it in our own backyard, for example, with an increase in warming the spring [inaudible 00:19:47] in this year at Nevada’s melt earlier and so you've got less moisture in the soil in the summer and that raises the likelihood of wildfires, the frequency of wildfires and it becomes in large part so California where Causeway is based, it's hard to get fire insurance.

Mozaffar Khan: An increase in warming in all of Southern Europe and other areas leads to an increase on the stress in water resources and availability, increases the cost of water. Here in the US the cost of water has gone up by 60% in the last 10 years. And so, if you're a food and beverage company, if you're a beverage company, if you're a food company, if you're a hydroelectric utility, those are all important costs.

Mozaffar Khan: So definitely global warming, very important. The other big under environmental issues is plastics. And we see an increase in plastics polluting waterways, polluting landscapes, so that there's going to be a lot of opportunity there for innovation to reduce the use of plastics.

Mozaffar Khan: On the social side, I think investors are... There two big issues. One is modern slavery and modern slavery could include things like child labor, deceptive recruiting and so on. And those are especially relevant for large companies with a global footprint and a very long and deep global supply chain. They can be vulnerable to some of these issues and we know that when these hit the headlines, there's real impact and a lot has to be done by these companies to remediate and it can be very costly.

Mozaffar Khan: So that's an important issue. The other big issue that resonates under the social pillar certainly in the US is diversity and inclusion. And what is the impact of a firm's practices, diversity policies on its performance? Governance, there are a lot of issues that have historically been important such as the independence of directors and pay for performance under compensation, shareholder rights and it's continuing to be important in addition to other issues that we've identified through our research. For example, the strength of country level institutions and the rule of law and so on. So, a variety of these issues that really are important to consumers and investors locally.

Jenna Dagenhart: And we know what a lot of these issues are, but how do we measure them? What are some of the sources of data on all these issues?

Mozaffar Khan: Yeah, that's a great question. Data has definitely been one of the challenges. And I think that there has been a lot of development improvement on that front. There are a lot of commercial data providers from which ESG ratings and ESG data can be sourced. At Causeway really, we have both fundamental and quantitative investment capabilities. And so, we look globally, not just at a large cross section of firms, but also in-depth at specific companies. And so, in terms of data, we're interested in global data that has high integrity.

Mozaffar Khan: And so we source data from a variety of sources. For example, we've used big unstructured data such as satellite and radar topography data to get a sense of coastal vulnerabilities. The data could be for example geocoded, which is indexed by latitude and longitude, helps us get precise sense of things like water stress that companies might be exposed to. And so really a variety of data sources out there both commercial and then proprietary data sources that firms have developed and identify.

Jenna Dagenhart: So in the same way, Kimberly said it's important to look at a lot of different issues, it's important to look at a variety of data?

Mozaffar Khan: That is correct. I think you want to be able to triangulate; you want to be... To test different datasets which at Causeway we do continually to try and identify what are the best data sources that we can bring to bear in really getting a good sense and quantifying firm's performance on ESG issues and the risks and opportunities they're exposed to. Because once we get, once we're able to quantify those better, we'll then have a better sense of what their exposures are and how to then construct an appropriate portfolio to mitigate some of those exposures and to capture the opportunities [inaudible 00:24:30].

Jenna Dagenhart: And David, what kinds of investments have a real impact would you say? What are the different facets of ESG?

David Sher: So clearly, there are many different ways of measuring impact. And as was mentioned by my colleagues here, there's a growing number of places to find data on how companies are acting on each one of these kinds of realms. For us, in our particular space as a manager of real assets, the equations for us are much easier. Every time we generate electricity, we measure it and we can compare it to how much a coal fired power plant [inaudible 00:25:17] carbon emission data. We also obviously can look at how many people we employ when we build a facility, how many people are ongoing employees of that facility. So, there's direct employment impact. And the other thing we try and do is we try and look at investor education about our space.

David Sher: We work with a lot of groups that are intermediaries. These are registered investment advisors and registered representatives who deal with the general public. So, we try and provide a lot of educational materials about renewables that they can use to explain what's happening in the markets of their customers. So, for us, it's very direct. In the broader industry, however, I think they've made a lot of strides to measure how things are done.

David Sher: So for example, in green bonds, the measurement of what the usage of the capital is being put for. So, if it's being used to build a solar facility on the roof or to do an energy efficiency retrofit of a building, that makes it very clear that there's real impact in the investment. So that's where I think it's going to have more direct measurement of the impact and hopefully that'll make it easier for people to know what is truly impactful.

Jenna Dagenhart: Kimberly, how do you view ESG integration? What is it or what should it be?

Kimberly Gifford: So I think even if you weren't familiar with the term ESG before this masterclass, you've actually probably likely heard the term ESG integration one way or another. And when many firms use the label integration, there's actually varying levels of depth to this approach. So, what's unique about ClearBridge's integration strategy is that we have the same analyst who's responsible for fundamental research, also responsible for evaluating the relevant ESG factors in our coverage.

Kimberly Gifford: And so what this really means in practice is that each analyst is defining a set of ESG criteria that's specific to their coverage area. And then they use that framework to look at relevant ESG risks and opportunities. And they incorporate their findings into an overall evaluation of the company as an investment opportunity. So, for example, there are some ESG topics that are relevant to pretty much every company. Things like corporate governance or human capital management.

Kimberly Gifford: Well, other topics are really relevant to most, such as energy efficiency or supply chain responsibility, but we've actually been identified some topics that can be very sector specific and pose very high ESG risks or opportunity for those sector. So, things like access to medicine or drug pricing for pharmaceutical companies or responsible lending practices for banks. And what we found is by having the fundamental and ESG analysis conducted by the same person, our analysts are able to identify and understand ESG issues that aren't quite in the spotlight yet, but they might be driving the success or the decline of the business in the long term.

Kimberly Gifford: And then we see this analyst led integration process, driving us to have meaningful and differentiated dialogues with company management teams. And through these engagements, what we're really trying to do is take the opportunity to encourage them to follow best in class ESG practices. Because we believe by following these practices, the companies will be able to differentiate themselves with long-term competitive advantages versus their peers, and they'll also be able to make a positive impact on society at the same time.

Jenna Dagenhart: Mo, how important would you say is ESG for investors today?

Mozaffar Khan: Yeah. I think our view at Causeway is that ESG issues are increasingly becoming inescapable for investors and really they have an impact there, they have a potential impact on firms both their costs, their future cash flows and their discount rates that you see advancements in technologies, whether it's renewable energy, more efficient batteries, for better energy storage, new carbon sequestration technologies, more efficient electric vehicles and so on.

Mozaffar Khan: That innovation creates opportunities. There are costs if a company is a high carbon emitter, then in terms of global caps in carbon taxes, there are going to be costs that they have to bear. They also have to think about how their consumers are responding to certain ESG issues and whether they might shift their consumption preferences away from a given company. And so really, these are very fundamentally... Excuse me. These are material ESG issues that are going to impact firm’s future financial performance, and therefore investors really have to pay attention to them. They're raw, they're global secular trends that really are relevant for investors.

Jenna Dagenhart: Kimberley, what sort of role does public equity ownership have to play in advancing environmental, social and governance goals?

Kimberly Gifford: Yeah, so we really believe public companies have substantial social and environmental impact that can be both positive and negative, that's affected by their size, the relationships across their supply chain and the communities where they operate. As an active global equity manager, we think we can magnify this impact through our allocation of capital, and also our engagement with company management teams to promote improvement. And so, this really comes in the form of two overlapping elements of our ESG strategy.

Kimberly Gifford: Just first focusing on integrating ESG analysis into the fundamental research that'll eventually flow through to portfolio construction, and then also using engagements with companies to drive positive change. And we really take a partnership approach to driving change with companies. So, something as simple as asking the right questions sometimes whether it be about gender equality, energy efficiency, better board governance or increased disclosure, this can result in a positive change in the mindset and eventually the business decisions and the overall business strategy.

Kimberly Gifford: We believe companies that really incorporate ESG into their business operations in authentic and holistic manner, should have this long-term competitive advantage over their peers. And our clients will be well served by investing in these companies.

Jenna Dagenhart: And Mo, how are asset managers responding to investors ESG interest?

Mozaffar Khan: Yeah. At Causeway, we've taken a very thoughtful approach to this. And it really all begins with... We start off, we conduct very deep differentiated research to really understand the underlying ESG issues. When we speak of ESG, we really think in terms of the specific underlying issues. And so, we conduct differentiated research on each of these issues, we try to develop differentiated frameworks that think about these issues and to develop new metrics to quantify firm's exposures to these underlying issues.

Mozaffar Khan: And so it starts with the research. And then the next part is integrating that, integrating ESG considerations in the investment process. And there really, we disseminate the research internally. We organize training sessions for all of our investment personnel, for all of our analysts on these issues and we also build tools and applications to facilitate ease that integration of ESG considerations in the investment process. And so, we're training the analysts and providing them with tools and frameworks and information to help them really integrate these in the investment process. So that's sort of been our approach to ESG investing.

Jenna Dagenhart: Kimberly, can you give an example of your engagement with a company from your own work? What does that process look like?

Kimberly Gifford:Sure. So, when we talk about engagement, it really all comes back to the ESG analysis being integrated into the fundamental day to day research. So, from the start, and more importantly, throughout our investment process, we're having ongoing conversations with the company we're looking at on a variety of topics. And as we're having these broader conversations about the business and the company's future and the current state of operations, specific ESG topics are naturally interwoven and come up organically in conversation.

Kimberly Gifford: And so this is definitely evident in the conversations we're having with companies the current moment centered around the responses to the COVID-19 pandemic. And so, we're talking about things like the current state of the business and getting employees back to work. And that naturally lends itself to talking about employee health and safety and how they're addressing the interests of all of their stakeholders.

Kimberly Gifford:But when I think about a more normal time and the engagements I've had with companies; it really depends on the industry they operate in. So, for example, while I'm a generalist, one of the areas As I focus on industrials. And one of the interesting aspects about evaluating industrials from an ESG point of view is they have significant risks and opportunities both internally and externally.

Kimberly Gifford: So when you think about the way, that they're running their manufacturing facilities or their overall corporate operations, but also thinking about the products and services they have and the impact that they have on the broader society. So I was having a conversation with management of a large equipment manufacturer and we started talking about how the technology that's embedded in our products was helping reduce waste from water and from pesticides, and also cutting down on the amount of water and pesticides that needed to be used in farming and also in the end of the day, improving farmers yields. So, you're cutting down on the negative aspects that are going in and coming out of the production process, but also improving the outcome.

Kimberly Gifford: So that just led us to having a broader conversation about the sustainability focus at the company. And it was something that maybe wasn't as mainstream, they didn't lead with that on their front foot. And so, we talked to them about how they could start providing increased disclosure about their operations, but also their products and services because we think that what you're doing internally is almost just as important as what you're doing externally. Because sometimes, the products or services you're selling could have a much bigger impact.

Kimberly GiffordIf you're manufacturing in a very efficient way, and you've taken all the steps to mitigate your kind of footprint, then you have to start thinking about the impact of your products or services externally. So, we're able to have these types of productive conversations with companies because we have long-term relationships with them. And they know that we focus on these issues as drivers of the business's success in the future.

Jenna Dagenhart: Helping the bottom line but also checking that ESG box.

Kimberly Gifford: Absolutely. Yeah. Both are definitely vital.

Jenna Dagenhart: Mo, how have ESG funds performed? Is there a tradeoff between Alpha and ESG?

Mozaffar Khan: It's interesting that some of the more prominent or more well-known ESG indices in both the global developed markets and US held up quite well in Q1 of this year, when obviously the equity markets were disrupted by the pandemic. I think they've also performed well, long term and that's really that's really important for us at Causeway, the way we look at ESG is we're fiduciaries and our investors ultimately are looking for investment formats and they're looking for investment returns.

Mozaffar Khan: And so, we view ESG really from the perspective of materiality and what that means is that for each company for each industry and sector, we try to identify those ESG issues that are material for investment performance and then to assess a company along on those issues. So, an example would be, if you look at the healthcare sector and you take a healthcare distributor, fuel consumption and efficiency is going to be a very material issue for the healthcare distributor. They have a large distribution fleet and so managing fuel consumption is going to be good both the environment and for the bottom line.

Mozaffar Khan: Within the same sector, if you have a health care provider that's not a heavy consumer fuel, that's not a material ESG issue for them. And so really, it's not that important then to measure, get a handle on the health care providers of fuel efficiency and consumption. And so, in this way, we really look at industry by industry and sector by sector. We've identified issues that are material both... That are helpful from an ESG perspective and that are also helpful in terms of financial performance. We use this materiality framework; we use data and we really look at the impact of ESG issues on future financial performance.

Mozaffar Khan: From our research, our research shows that there is no tradeoff between ESG and Alpha and really once we get to identify the ESG issues that are material by industry and by sector and we were able to extract signal from noise and construct portfolios accordingly, that we observe really Alpha from these portfolios and that is investment outperformance. Some companies that have good performance on environmental, social and governance issues also have good future financial performance if we're able to identify those issues correctly.

Jenna Dagenhart: And David, how is renewable energy fared in the market turmoil? You mentioned earlier that the COVID-19 pandemic really hasn't had a negative impact on performance.

David Sher: I think it's really important to distinguish between different parts of the market. Renewable energy obviously involves technology, it involves development, it involves manufacturing, and then it also involves on the other end, owning solar and wind farms, which is pretty much what we do. At the end of the development, we'll own the wind or solar farm and sell electricity. That segment of the market has performed extremely well. To quote a Wall Street Journal article from the end of March, solar and wind farms are seen as safe havens in the Coronavirus storm and there are several key reasons for this.

David Sher: Number one, renewable energy infrastructure of this kind are generally built with long-term contracts in place of between 15 and 25 years, where you sell all the electricity to a known entity over that term and the buyers are generally going to be credit worthy counterparties like utilities or municipalities and partially corporations. Utilities and municipalities are of course, the central service providers, meaning they can't cease to provide their services to the public. They're seen as critical to the economy.

David Sher: Of course, electricity itself is absolutely a critical service without which the economy could not function. We actually just wrote an article kind of going through some of these elements called stability in the storm and it talks about the resilience of renewable energy infrastructure. And so, I think we're going to be posting that to our website shortly. We think that those are the kinds of things that make renewable energy infrastructure truly uncorrelated with the market. They're just sort of necessary going forward right now. And like I said at the outset, that's one segment of the market. Certainly, installers of residential solar have been impacted, manufacturers have been impacted, but the solar and wind farms themselves have not.

Jenna Dagenhart: Gold isn't the only safe haven asset out there.

David Sher: Correct.

Jenna Dagenhart:And Mo, how is ESG used as a risk management tool?

Mozaffar Khan: Yeah, so certainly, a lot of the ESG risks that companies might be exposed to, for example, if you have a large carbon emitter and you want to have a sense of carbon tax schemes that they might be exposed to in various jurisdictions within which they operate, you'd want to monitor those exposures for your portfolio. Another example could be corporate governance risks, headline risks relating to corporate governance. If a company is operating primarily in a country that has relatively weaker institutions and relatively a weaker rule of law, then that would be something that you'd want a monitor in your portfolio. And so, I think a lot of these ESG risks definitely can be part of monitored exposures.

Jenna Dagenhart: And it's been a very historic time for oil. We've seen negative prices for the first time ever. David, how is the turmoil in oil markets impacting renewable energy growth projections?

David Sher:So let's start with the basics. Oil accounts for less than 1% of electricity produced in the United States. We simply don't have power plants that run on oil. So, there's really no effect there. Where there is an effect is natural gas, which accounts for about 38% of US electricity production. Natural gas prices have fallen obviously due to weak demand across the economy. So that's made it cheaper for power plants that use natural gas.

David Sher: However, and somewhat ironically, natural gas production is in some cases a byproduct of oil production and drilling. So, if there's no drilling for oil due to low prices, it may lead to shortages and higher prices for natural gas since natural gas is expensive to import. It's hard to substitute. We think that overall, people are becoming more and more focused on renewables as a growth sector in the economy.

David Sher: We're seeing tremendous interest from investors across the globe to invest in renewables and we don't think that the general public is looking to go back to the coal days. In spite of all of the discussions about this administration's love for coal, we haven't really seen that. We've seen coal plants closing coal mines closing. So, we think it's really just moving in the direction of renewables in a big way. That's a long-term trend.

Jenna Dagenhart: And building off of that, I mean, we've even seen fossil fuel companies investing in Renewable Energy. Why do you think that this is?

David Sher: Well, I think partially, energy companies like oil companies are seeing the writing on the wall. They want to participate in what they believe is going to be a global opportunity for investment. And this is being driven by the electrification of everything. If you look at Exxon's own forecasts, they expect global electricity demand to rise by 60% through 2040. So, a gigantic increase in the use of electricity. They want to be part of that business and they see that renewables are we to get there.

Jenna Dagenhart: And Kimberly, looking forward, where do we go from here? What's your longer-term outlook for ESG?

Kimberly Gifford: Yeah, I think we now know the notion of ESG performance as a tradeoff for investment performance. It's really in math. And we've been able to disprove that over our 30 years of ESG investing experience. And I would add now that what we're really seeing is ESG is becoming a de facto part of consulting conversations. And that's being really driven by end client demand. The interest is really broad based across geographies.

Kimberly Gifford: So we've seen interest in the US increasing to similar levels of interest in Europe and we're also seeing interest in Japan that's really coming from the top down driven from a government level. So, I think as we look out into the future, we'll see higher levels of scrutiny of ESG products and the investment performance and impact performance will really be key.

Jenna Dagenhart: Mo, what forthcoming development should investors be aware of?

Mozaffar Khan: Yeah, I think this is an exciting time looking forward for investors and Causeway is an active manager and so we look globally for investment opportunities. I think investors, a couple of things that should be very exciting; one, there's clearly going to be a lot of technological innovation in a lot of different areas. It could be renewables, it could be finding substitutes for plastics, it could be new battery technologies and energy storage technologies, decarbonization technologies. All of these technologies really create opportunities. Which companies are best positioned to exploit these opportunities, to uncover these opportunities?

Mozaffar Khan: And so for investors, that's exciting to be able to identify those companies. The other exciting part for investors is there's going to be an increase in investment choices for them and ESG funds and ESG funds are really going to be mainstream. We have a lot of ESG... It's really going to become the standard offering really. And so, there's going to be an increase in investment offerings that investors can choose from and that's... So that choice is exciting as well.

Jenna Dagenhart: David, where do you think the industry is headed? Any trends that you're watching?

David Sher: Well, so overall, I believe that more and more investors are looking at ways to make their investments fit their values. I think this is definitely an undeniable trend. I would say this is particularly true with younger investors who've been educated on the importance of global climate change, the need to change society to be more inclusive and all of these elements that we've been speaking about.

David Sher: According to consulting firm, I believe it's a really an associate's, there's going to be a $68 trillion change of hands from baby boomer and older generations to millennials and younger people over the course of the next couple of decades. And that's going to drastically change the way investors view the world. Millennials in general are already showing how much they want to make positive change with their investments and with their career choices. I think overall, there's going to be a continued rapid growth in investment strategies that can truly prove that they're socially responsible.

David Sher: And I think there's going to be more and more of a trend to really try and measure the impact that investments are making on these environmental, social and governance goals. Renewable energy, we expect to be a standout sector for environmental goals along with water, with desalinization, with carbon reduction through energy efficiency and batteries. So overall, we think that there's going to be a lot of investment opportunities and sustainable infrastructure. Overall, the industry, we think, is poised for a lot of growth.

Jenna Dagenhart: Yeah, it's interesting that you bring up that massive generational wealth transfer on the horizon. I know that's come up in a lot of my conversations with advisors and they're saying a lot of younger generations, millennials are very interested in making sure that their portfolios align with their values.

David Sher: Yeah, absolutely. I mean, I've been working on Wall Street for many years, I've worked at investment banks, I've worked as a fund manager, I've worked in trading and a bunch of different businesses. This is literally the first job that I can say that my son thinks is cool.

Jenna Dagenhart: That's great. And Kimberly, any final thoughts on your end?

Kimberly Gifford: Yeah, I would just echo what my colleagues here say. I think it's a really interesting and exciting time for ESG investing. It's been in the space and it's been in the industry for a while, but it's really coming to the forefront and each kind of letter has its own time and the sun here with environmental and now COVID-19 really bringing to light some of the really important issues that are buried under the S.

Kimberly Gifford: And so I think now we'll start getting a more holistic view as ESG relates to companies and investing and putting your dollars to work, where you believe in the long term trends at the company and the way that they're addressing sustainability in their business models.

Jenna Dagenhart: Mo, anything you'd like to add?

Mozaffar Khan: No. I think... I would echo and I would agree with my fellow panelists have just mentioned. I think this is an exciting time. I think there is a lot of growth ahead. And some of that growth is actually I think not aware. I think we have yet to discover, I think, all the ways in which these issues are going to impact firms and really for this area, this ESG investing area to grow. I think it's exciting. I think it's promising and there's a lot of growth ahead, a lot of opportunities.

Jenna Dagenhart: Well, thank you so much for your time, everyone. It was really great to have you.

David Sher: Thank you.

Jenna Dagenhart: And thank you for watching this ESG masterclass, I was joined by Kimberly Gifford; portfolio analyst, sustainability leader strategy at ClearBridge Investments, Mo Khan; Quantitative Senior Research Analyst at Causeway Capital Management and David Sher; co-CEO of Greenbacker Capital. And I'm Jenna Dagenhart with Asset TV.